MFs are now attempting to push ‘simplified products’ like hybrid funds, having learnt a hard lesson after the NFO boom of 2006-07. Except that they are again following each other lemming-like in launching similar hybrid products
Faced with dwindling assets caused by changing regulation and investor apathy, mutual fund companies have now hit upon a new strategy - launch all-in-one or hybrid products. These products combine multiple asset classes in one, supposedly making the job of asset allocation easy. Axis Triple Advantage Fund, now on offer, gives investors the chance to participate in three asset classes - equity-related, fixed income and gold.
In April 2010 Religare Mutual Fund pioneered the move in this direction by launching a scheme that seeks to generate income through a portfolio of fixed income securities, gold and equity-related instruments. The scheme would invest 65%-90% in debt instruments, 0%-25% in equity and 10%-35% in gold ETFs (exchange-traded funds). The scheme is benchmarked against CRISIL MIP Blended Fund Index (65%) and price of gold (35%). Taurus Mutual Fund has just launched an open-ended income scheme called 'Taurus MIP Advantage' fund. The scheme is identical to Religare's. It aims to generate regular income through a portfolio of fixed-income securities, Gold ETFs and equity. The scheme is benchmarked against CRISIL MIP Blended Fund Index (75%) and price of gold (25%). Clearly, no sooner has one fund company launched a new kind of product than lemming-like, others are rushing in, offering identical products.
But what is the reason that fund companies are looking at hybrid funds for their salvation? It appears that the stricter regulations enforced by the Securities and Exchange Board of India since August last year has led to a drop in new sales of equity funds and some deep introspection among the fund community. Since the massive bull run of 2003-2007, the only way fund companies wanted to grow was bringing new funds to the market. The standard strategy was to tempt investors with new fund offers (NFOs), many of which had fancy names and complicated strategies. Fund companies gave fat incentives to distributors in order to encourage investors to sell their existing funds and buy the new ones - especially since they were available for Rs10 - which was of course, highly misleading.
Unfortunately, this led to terrible performance of the vast majority of funds launched during this period. And when SEBI took away the fat upfront incentives for distributors, fund sales nosedived. Now, the MF industry is aiming to build rapport with investors by offering 'simplified' solutions to them in the form of hybrid funds.
The logic behind it is to offer investors the 'opportunity' to participate and gain exposure to different asset classes under one roof. Hybrid funds invest in a mix of equity and equity-related instruments and fixed-income securities. Some even invest part of the corpus in gold ETFs (exchange traded funds), a recent favourite among investors. This stands in sharp contrast to the relentless spewing of innovative and complicated fund offerings in the recent past.
Rajiv Anand, managing director and CEO of Axis Asset Management Co Ltd recently wrote in newspaper Mint that "MFs spend a lot on getting new investors, but pay little attention to existing ones. But MFs are not a one-time fill-it-forget-it product... We need to find ways to meaningfully engage with these investors." In a burst of plain speaking Mr Anand wrote, "In all the cloud and dust created by a surfeit of NFOs and products, the ultimate use of the product has been completely compromised somehow." According to him the biggest challenge for the fund houses and distributors is to prepare themselves for the arduous journey of getting investments in their existing funds pretty much on a 24x7x365 basis." You thought that Axis Mutual Fund would stop launching NFOs and push its existing products? Despite all this talk, Axis has gone down the same road as its peers and done exactly what the rest are doing. It has announced a me-too NFO! It seems that fund companies will continue to move in herds and be driven by the fad of the day.
Interestingly, coinciding with the Axis Bank NFO opening for subscription, Mint gave Mr Anand an opportunity in to beat his own drum: "The one obvious way is to educate, and, perhaps, the other is to ensure that products… should blend equity and debt components. In other words, they should be hybrid funds." How nicely self-serving.
That leaves us with one last question. Do the 'simplified' hybrid offerings make sense for investors? Hybrid funds, in essence, are souped-up versions of existing products in the market - like balanced funds and monthly income plans (MIPs). While these offer investors capital protection with a chance to participate in equity markets, hybrid funds go a step further - they simply add gold to the soup. Instead of simplifying matters, hybrid funds would only complicate them further. They will not match the returns of equity, they will be marginally better than debt, they will still be more volatile than fixed income. Finally, gold, now historically high, may drag down their returns drastically. Invariably, such funds will lead to very average returns for the investor. The question is do investors care anyway, as long the fund industry tries to do everything except one thing they need to do - directly reach out to investors and engage them?
The Aadhaar project of the UIDAI will just provide unique ID numbers and not unique ID cards as was widely thought
The Unique Identification Authority of India (UIDAI), which is all set for a pilot rollout of its ambitious unique ID (UID) project Aadhaar, will be spending a whopping Rs45,000 crore on the project. But all this money will be spent only on creating a UID number and not a physical ID card-since there is no budget for issuing such cards.
The very first paragraph on UIDAI's website clearly says that its job is to issue unique identity numbers and not physical ID cards. Here is what the site says:"UIDAI has been created as an attached office under the Planning Commission. Its role is to develop and implement the necessary institutional, technical and legal infrastructure to issue unique identity numbers to Indian residents."
This also means Aadhaar is not an ID card but just a unique number. Much more work needs to be done before it can become a smart card for proper identification. So who will issue the ID cards? Most probably, the responsibility will rest with entities which issue ration cards and voter ID cards.
"Nandan (Nilekani, the chairman of UIDAI) wants to keep his hands and conscience clean by just taking on the responsibility of issuing unique numbers to people. He will leave the issue of smart cards to the other corrupt bureaucracies that are responsible for issuing ration cards and voter (ID) cards," said an IT expert, preferring anonymity.
The UIDAI will collect face details, fingerprints from all ten fingers and iris attributes of all residents for ensuring uniqueness of the identities. For collecting data, UIDAI will use various State and Union government agencies-called 'registrars'-like the departments of rural development, public distribution and consumer affairs along with employees of banks, State-run insurance agencies and oil-marketing companies.
The first set of UID numbers will be issued between August 2010 and February 2011.
Thereafter, 600 million UID numbers will be issued in the next five years. The numbers will be issued through various registrar agencies across the country, says the UIDAI website.
Earlier in April, the Income-Tax Department's proposal to issue biometric PAN cards had been put on hold to avoid duplication with the UID numbers to be issued by the UIDAI. A senior finance ministry official had said, "The biometric PAN card project of the department has been kept in abeyance till the UID is rolled out. In the meantime, the suspension will allow the I-T Department to understand and analyse whether after (the issue of) a biometric UID, a PAN with similar features would be necessary or not." (See: http://www.moneylife.in/article/8/4580.html).
After spending about £250 million over eight years on developing the national ID (NID) programme, the UK government abolished it earlier this year. This scrapping of the project means that Britain will avoid spending another £800 million over a decade. The NID was launched in July 2002-and as of February 2010, its total costs rose to an estimated £4.5 billion. The UK government has cited higher costs, impracticality and ungovernable breaches of privacy as reasons for cancellation of the NID project. These concerns may impact India as well. (See: http://www.moneylife.in/article/8/5684.html).
Finance minister Pranab Mukherjee had sanctioned Rs1,900 crore for the UIDAI in his Budget for FY11. According to estimates, the total cost of the UID project will be over Rs45,000 crore.
UIDAI itself had admitted that the cost of running such a huge database over years will cost a lot. According to a document on UID numbering available on UIDAI's site, systems that are to be as widely used and for multiple different applications such as the UID will have to be in active use for a very long period.
"Once a billion plus people have been assigned a UID, and applications using the UID to conduct their transactions are evolved, anything that requires modifications to existing software applications and databases will cost a lot," the document said.
MAT, which was introduced to bring non-tax-paying companies into the tax net, is currently imposed at 18% of the book profit
The Federation of Indian Chambers of Commerce and Industry (FICCI) today demanded that the minimum alternate tax (MAT) rate be cut to 15% of the book profit in the Direct Taxes Code (DTC), reports PTI.
Besides, the chamber in its representation to the finance ministry on the DTC also suggested that all pension schemes be exempted from payment of tax.
"...the rate for MAT be a specified percentage and in no case more than 50% of the basic corporate tax rate... as the existing corporate tax is 30%, accordingly MAT rate should be 15%," FICCI said in its agenda to the government.
If the corporate tax is reduced to 25%, MAT should be fixed at 12.5%, it added.
While revising the original DTC proposal, the finance ministry last month dropped the proposal to impose MAT on gross assets.
MAT, which was introduced to bring non-tax paying companies into the tax net, is currently imposed at 18% of the book profit.
As per the revised code, individuals would enjoy tax exemptions in select savings schemes — public provident fund, pension schemes, including the government's new pension scheme, general provident funds, recognised provident funds, pure life insurance and annuity schemes.
FICCI in its recommendation said, "All pension funds, which are currently registered with the income tax (I-T) department be covered for the purpose of Exempt-Exempt-Exempt (EEE) method instead of restricting it to certain categories."
Under the EEE mode, the tax exemption is enjoyed at all the three stages--investment, accumulation and withdrawal.
The other suggestions made by the industry body, including the Special Economic Zone (SEZ) developers, who got approval before DTC became effective, should continue to get the exemptions after the introduction of the code.
The government last month came out with the revised discussion paper on DTC, which dropped many controversial proposals of the original draft code to help individuals and companies save taxes.
The government had proposed to bring a bill on DTC in the monsoon session of Parliament and hoped that the new Act, replacing archaic Income Tax law, would be implemented from the next fiscal.